Simon Corp. manufactures chain saws. Management is interested in outsourcing pro
ID: 2485986 • Letter: S
Question
Simon Corp. manufactures chain saws. Management is interested in outsourcing production to a reputable company that can supply the saws for $250 per unit. Simon Corp. incurs the following annual production costs to produce 6,000 saws internally:
Per Unit cost at 6,000 units
Variable production costs:
Direct materials $180 $ 1,080,000
Direct labor 50 300,000
Manufacturing overhead 20 120,000
Fixed production costs:
Factory building and equipment lease 220,000
Factory insurance 90,000
Production supervisor salary 65,000
Total production costs $1,875,000
Outsourcing production eliminates all variable production costs, the production supervisor's salary, and factory insurance costs. Factory building and equipment lease costs will remain the same regardless of the decision to outsource or to produce internally.
1. Perform differential analysis, assuming that making the chain saws internally is alternative 1, and buying the saws from an outside manufacturer is alternative 2.
2. What would be your recommendation, regarding outsourcing production of chain saws? Give a least 2 supporting reasons for your recommendation.
3. Give 1 qualitative factor that would be a consideration in your decision.
Explanation / Answer
Answer:1
Answer:2 Outsourcing Production of chain Saws cost is less than internally.
1. Cost Savings
2. Saving in supervisor salary and Factory insurance
Answer:3 1 Qualitative factor:
Cost Saving
Differential Analysis Particulars Alternative 1 Alternative 2 Differential Cost Alternative 2 Over Alternative 1 Variable Production costs: Direct material 1080000 -1080000 Direct labor 300000 -300000 Manufacturing overhead 120000 -120000 Fixed Production Costs: 0 Factory building and equipment lease 220000 220000 0 Factory insurance 90000 -90000 Production supervisor salary 65000 -65000 Purchase Cost 1500000 1500000 Total Production costs 1875000 1720000 -155000Related Questions
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